Inflation
- rise in general level of prices
- standard rate: 2% to 3%
Measuring Inflation
- Inflation Rate
- measures percentage increase of price level over time
- key indicator of economy's health
- Deflation
- decline in general price level
- Disinflation
- occurs when inflation rate itself declines
- Consumer Price Index (CPI)
- measures inflation by tracking the yearly price of a fixed basket of goods and services
- indicates changes of cost of living and price level
Solving Inflation Problems
- Finding inflation rate using market basket data
((current year market basket data - base year market basket data) / base year market basket data) x 100
- Finding inflation rate using price indexes
((current year price index - base year price index) / base year price index) x 100
- Estimating inflation rate using the rule of 70
- used to calculate number of years it takes for price level to double at any given rate
years needed to double inflation = 70 / annual inflation rate
- Determining real wages
(nominal GDP / price level) x 100
- Finding real interest rate
- Real interest rate
- cost of borrowing or lending money adjusted (expressed as %) for expected inflation
- Nominal interest rate
- unadjusted cost of borrowing or lending money
Causes of Inflation
- Demand - pull inflation
- caused by excess of demand over output that pulls prices upward
- Cost - push inflation
- caused by rise in per unit production cost due to increase of resource cost
Effects of Inflation
Anticipated v.s. Unanticipated inflation
Hurt by Inflation
- fixed income
- savers
- lenders/creditors
Helped by Inflation
- borrowers
- debt will be repaid with cheaper dollars than that which was loaned out*
- fixed contract
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